Voluntary Carbon Markets
2021 will probably be remembered as the year when carbon finance emerged as a talking point among a wide range of industries. In a market note released at the start of May, the most liquid carbon credits exchange currently, the New York-based Xpansiv CBL, shared a figure that made that clear: on May 7, CBL's year-to-date carbon volume of more than 30 million tons of CO2 traded emissions was already approaching 2020's full-year record of 31 million tons.
Among the 2021 new entrants in voluntary carbon markets, oil and gas majors, hedge funds and banks were heard as the most active players, resolutely taking positions in the market.
Many political entities like the EU, the UK or the state of California already have mandatory carbon markets covering specific industry sectors and gases. These form an important part of the effort to meet the Paris Agreement target of limiting global heating to 2 degrees Celsius above preindustrial levels, with a more ambitious ideal of remaining within a 1.5 C increase, although it should be noted that some of these markets predate the Paris commitments.
But other sectors have taken a cue from compliance schemes and pledged to offset their greenhouse gas emissions (GHG) by participating in carbon markets voluntarily.
Voluntary carbon markets allow carbon emitters to offset their unavoidable emissions by purchasing carbon credits emitted by projects targeted at removing or reducing GHG from the atmosphere. Companies can participate in the voluntary carbon market either individually or as part of an industry-wide scheme.
While compliance markets are currently limited to carbon credits from a specific region, voluntary carbon credits are significantly more fluid, unrestrained by boundaries set by nation-states or political unions. They also have the potential to be accessed by every sector of the economy instead of a limited number of industries. The Taskforce on Scaling Voluntary Carbon Markets, sponsored by the Institute of International Finance with support from McKinsey, estimates that the market for carbon credits could be worth upward of $50 billion as soon as 2030.
